What Is a Conflict of Interest?
A conflict of interest (COI), also known as the duality of interest, refers to a situation where a board member may have affiliations that could prevent them from making impartial decisions regarding the nonprofit organization. These conflicts or duality, though sometimes not intentional, may exist from both personal and professional relationships.
For example, a board member who owns a sporting goods store or who might just work for a sporting goods company. While it may seem like an easy option to just purchase your goods from that Board member’s company, it’s not always the best option and one where you will need to do your due diligence to ensure that nothing could be viewed as underhanded.
There is also what is considered a perceived COI as a "benefit from interest" or a circumstance in which the non-profit organization benefits from the affiliations of its board members. In the example above, should the sporting goods store decide to offer their products at a lower price, then the non-profit is at an advantage.
Because of these peculiar situations, the board should establish certain controls that protect the interests of the non-profit organization.
Why Record Conflicts of Interest?
In essence, a COI has the potential to jeopardize the loyalty of a board member. This becomes a concern because among the three primary legal duties of non-profit board members and officers, is their Duty of Loyalty towards the organization.
As such, to uphold the confidence of the public, the organization's members, and other stakeholders, there needs to be a record of COI. Along with this, there should be a COI Policy that provides guidelines on how these transactions should take place.
The COI policy takes into account any relevant law governing these transactions and should stipulate how the dealings will be communicated to the concerned parties. Keep in mind that the laws vary from state to state.
IMPORTANT: The Internal Revenue Service (IRS) can impose intermediate sanctions against a person or organization that benefitted from conflicts of interests that were not declared and managed correctly. Because these may be categorized as excess benefit transactions, the penalties can be significant.
What Should a Conflict of Interest Policy Include?
Two basic directives need to be present in a COI policy:
A requirement for those with conflict (or who think they may have a conflict) to disclose this information or any future conflict that they think may arise as they perform their duties as members of the board
A prohibition for board members with a COI to vote on any matter in which there is a conflict.
Aside from these, it will be up to the board to determine any other policies or measures that will help them manage conflicts. These may also include how investigations should be done when an actual conflict of interest is found, and what actions the board may employ. These are also the information asked in IRS Form 990.
Keep in mind also, that some state laws set forth what must be included in a nonprofit's COI policy. The state of New York, for example, through the New York Nonprofit Revitalization Act of 2013, provides guidance for drafting the policy, which must state that board members must uphold the "best interest of the nonprofit."
As such, it is best to know the state-specific best practices for non-profit organizations that apply to you and incorporate these in your COI policy.
Recording Conflicts of Interest
Most often, it is the board president or secretary who is in charge of requesting each director to sign the COI policy when they take office. They are also the ones responsible for keeping a copy in the organization's files.
To ensure that the COI information is up-to-date, many non-profit organizations send out a yearly questionnaire. These questionnaires ask board members to disclose existing COI's and may also include a reminder to advise the board of any potential ones. This could be a simple declaration of their financial interests, and memberships in other social or professional organizations. Then these COI’s are noted and kept on a list or a COI Register.
We believe since people’s situations can change frequently, it’s best to make it part of the monthly board meeting agenda. This gives everyone the chance to present that COI, or perceived COI, to the board for proper discussion if needed. Additionally, that COI will not only be marked in the COI register but also becomes part of the meeting minutes. This ensures transparency or disclosure in a multitude of ways.
In any situation where there are major purchases or repeated purchases over time, you should safeguard the organization by obtaining competitive bids. This ensures that the organization is obtaining the products or services from the board member at the best possible price in the market.
This is also something you should consider including in your COI policy.
A policy on Conflicts of Interest ensures the credibility of an organization and its board members. Keeping a register that is available to any member or stakeholder and ensuring there is an opportunity to discuss and update that register at the board meetings, creates transparency and trust. While this may require added efforts, it is a necessary safeguard to protect the interests of the organization.